康明斯 (CMI) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter, 2007 Cummins Inc. earnings conference call. My name is Jacque, and I will be your operator for today's conference. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS) I would like to turn the presentation over to your host for today's call, Mr. Dean Cantrell, Director of Investor Relations. You may proceed, sir.

Thank you, Jacque. Welcome everyone to our teleconference today to discuss Cummins's results for the second quarter of 2007. Participating with me today are our Chairman, Tim Solso; our Chief Financial Officer, Jean Blackwell; our President and Chief Operating Officer, Joe Loughrey; and President of our Power Generation Business, Tom Linebarger. We will all be available for your questions at the end of the teleconference.

This teleconference will include certain forward-looking information. Any forward-looking statement involves risk and uncertainty. The Company's future results may be affected by changes in general economic conditions and by the actions of customers and competitors. Actual outcomes may differ materially from what is expressed in any forward-looking statement. A more complete disclosure about forward-looking statements begins on page 61 of our 2006 Form 10-K and it applies to this teleconference.

During the course of this call, we will be discussing certain non-GAAP financial measures and we refer you to our Website for the reconciliation of those measures to GAAP financial measures. Our press release with a copy of the financial statements and a copy of today's Webcast presentation is available on our Website at www.cummins.com under the heading of Investors and Media.

Now, some comments regarding each of our four operating segments beginning with the power generation segment. The power generation segment performed at record levels once again this quarter, as global demand remains high for their products. Revenue increased in each line of business and in nearly every region. The growth was primarily due to strength in the sales of commercial generator equipment and alternators, particularly in North America, India, the Middle East and Europe. The consumer market was up 13%, as increases in portables, recreational marine, commercial mobile and the new auxiliary power units offset the continued softness in recreational vehicles.

For the year, we expect segment sales to grow 21% to 26%. Demand for commercial generator equipment, including alternators, remains strong due to construction spending on data centers in North America and India and on general infrastructure development in the Middle East. Consumer sales are projected to increase primarily on the strength of portable genset sales. Segment earnings increased 57%, as significant price realization and favorable overhead absorption from higher volume offset the higher material costs.

Continued significant price realization and clear visibility to a busy order board are forecasted to sustain earnings for this segment above the top end of its targeted range of 7% to 9% of sales for the year. Engine segment revenues were a record this quarter, with growth in all industrial markets and nearly all on-highway markets. Construction, mining, marine, and oil and gas markets led the growth in industrial revenue.

In on-highway markets, growth in medium duty truck and bus and light duty automotive and RV offset the downturn in heavy duty truck. Segment earnings were only slightly lower than the second quarter of last year, which was a record quarter, as higher revenues and joint venture income offset the lower gross margins. As expected, gross margin was lower due to higher new product introduction and ramp up costs and higher material costs on the new 2007 engines. Additionally, we are accruing higher warranty expenses until we gain experience with the new engines.

Based on the strong performance in this quarter, we now expect engine segment revenue to increase 5% to 7% for the year. In addition to the sustainable demand in all of our industrial markets that we have communicated on previous calls, our forecasted revenue from on-highway markets has improved based on noticeable market share gains. Segment earnings for the full year are expected to be solidly within the targeted range of 7% to 10% of sales. Our view of the heavy duty truck market in North America remains unchanged, as we still expect NAFTA, Class 8, group two truck sales to be down 40% to 45% this year, with engines down more than 50% due to stockpiling in 2006.

However, our shipments to the heavy duty truck market were better than expected in the second quarter, as we continued to benefit from strong export markets in Mexico, Australia and South America, as well as significant market share gains in North America. Overall shipments to the heavy duty truck market were down 32%, compared to last year, with a 42% decline in our shipments to North America. This decline, while significant is less than the decline in the market due to our market share gains.

Volumes in the second half of the year will exceed the first half and we anticipate ending the year at or near our current year-to-date market share position of 33% in North America. Shipments to the medium duty truck market were up 22% over last year, as a strong agriculture market in Brazil; market share wins in North America at PACCAR, Freightliner and Ford; and economic growth in Europe all contributed to the positive performance.

For our bus markets, shipments were up 69% with strong growth in international transit bus markets in India and China and market share gains in the North American school bus market. We anticipate these trends to continue through the rest of this year and still expect our global, medium duty truck and bus shipments to be up approximately 25% this year. Global light duty automotive and RV shipments were up slightly this quarter on higher shipments to both markets in North America.

Revenue grew noticeably more than shipments due to higher pricing for the emission compliant 2007 product. Our shipments to the recreational vehicle market will grow 10% to 15% this year due to increased availability at key OEMs. However, light-duty automotive shipments will be flat in 2007, as increased availability of our product in a new class of commercial vehicles will offset softness in shipments to the heavy duty pickup truck market. For the full year, combined shipments to the light duty automotive and RV markets will increase slightly. Revenue from our global industrial markets increased 29% due to growth in construction, mining, marine and oil and gas end markets.

In construction, global infrastructure development continues, especially in international markets. And we are benefiting from our global presence and solid product offering. The other industrial markets of marine, mining and oil and gas continue to be driven by sustained high prices for petroleum and mineral commodities.

We will continue to grow in these markets as each end market is expected to achieve solid double digit growth this year and as we complete our high horsepower manufacturing capacity expansion of 15% by mid-2008. Distribution revenue was up 24%, excluding the impact of the reporting change of a North American distributor. Sales of power generation equipment, primarily in Europe and the Middle East, were the largest contributor to year-over-year growth.

Revenue from engines and parts also grew significantly, especially in Europe. Joint venture income increased by more than 70% and represented more than half of the segment earnings, with nonresidential construction driving activity for our North American distributors. The power generation market in North America has been strong and continues to look good for the rest of this year and into 2008. Based on an improved outlook for our distribution business, particularly in Europe and the Middle East, we now expect the segment to grow this year between 17% and 22%, excluding the reporting change.

Global, nonresidential construction and economic expansion will drive distribution revenue and we expect segment earnings to remain above the top end of the segment's targeted range of 8% to 10% of sales. Component segment revenue increased to 34% from the same period last year, with growth in all four businesses, especially emissions solutions and turbo technologies. Sales of new products to help customers meet the on-highway emission standards in the U.S. and Europe drove the increases.

Filtration revenue grew due to higher sales in Europe, Middle East and Africa and sales of 2007 emission related products in North America. Based on an improved outlook, particularly from our emission solutions and turbo technology businesses, revenue is expected to grow 22% to 27% for the year. Gross margins were lower, as a percent of sales, due to higher new product costs and increases in metal markets, particularly nickel for our turbochargers. Through focused cost control efforts, the segment was able to keep the growth in SAR lower than the growth in sales, resulting in a higher EBIT margin than the second quarter of last year.

By business, filtration and emission solutions had the largest year-over-year increases in earnings. Both businesses achieved significant absorption benefits from higher volumes and offset expenses for the plant closure in filtration we announced in the second quarter. The actions we have taken over the last year to improve the profitability of this segment are paying off. All businesses in this segment were profitable this quarter and we expect them to be profitable for the full year.

We are pleased with the improvement they have made and remain confident that we are well on our way for segment earnings to reach the low end of the targeted range of 7% to 9% of sales by the fourth quarter of this year. Now, I will turn it over to Jean to comment on our consolidated income statement, cash flow and guidance.

Good morning. By most measures, this quarter was one of the best in our history. Along with record revenue as a Company and in three of our four operating segments, we achieved record earnings before interest and tax and record segment earnings in three of our four segments. Consolidated earnings before interest and taxes were 10.6% of sales, well above our targeted range of 7% to 10%. Net earnings for the quarter were just slightly lower than the second quarter of last year, due to the fact that the second quarter of last year included a $28 million credit in the tax line.

International revenue accounted for more than 50% of our consolidated revenue in the quarter. Year-to-date, 53% of our revenue is from outside the U.S. This geographic diversity, along with greater end market diversity, has allowed us to grow profitably, even when a key end market has been down significantly. Results this quarter demonstrate, once again, that our strategy of diversity in markets and geographies is working.

As expected, gross margin was slightly lower than the second quarter of last year. A higher mix of new products pressured margins with higher production costs and warranty accruals that are typical for new products. Gross margins will improve throughout the year, particularly in the engine and components segments, as we increase volumes and gain manufacturing experience with our new products. Total selling, admin and research and engineering spending in the second quarter was 11.6% of sales, down from 13.2% in the second quarter last year.

We expect our full year will reflect this trend of growing SAR slower than sales during the year. Research and engineering spend will continue to be about 3% of sales, as we support the profitable growth opportunities we have announced over the last several quarters. Income from joint ventures was 41% higher than the second quarter of last year. Sales of power generation equipment continued to be the biggest driver of year-over-year growth in North America distributor joint ventures.

In the engine segment, joint venture income increased due to a seasonal strengthening in the truck market in China. As a result, we are increasing our outlook for joint venture income this year to an increase of 20% to 25% over last year. Cash flow from operating activities was an inflow of $269 million this quarter, compared to a cash inflow of $337 million during the same period last year. The difference is primarily attributable to higher cash expenditures for income taxes, which was $97 million higher this quarter than the same period last year.

While working capital as a percent of sales is above last year's level, we did see improvements sequentially from the end of the first quarter of this year. We will continue to manage working capital to appropriate levels as the complexity and global nature of our businesses increases. Before moving on to talk about guidance, I would like to spend a few minutes reviewing our strategy for uses of cash.

Let me remind you, we have three elements to our cash management strategy. First, we want to have a strong balance sheet. Over the last several years, you have seen us aggressively reduce our debt to a much healthier level. As a result, our balance sheet is much stronger, a point that was recent cited by Fitch Ratings, as they were the first rating agency to upgrade us since we were moved to investment grade over one year ago.

Our stronger balance sheet puts us in a great position to take advantage of growth opportunities and withstand downturns in end markets. We also saw the benefit of lower debt in this quarter's earnings, as interest expense was reduced by nearly 50%. Additionally, we are addressing liabilities, as we contribute $230 million to $240 million to our retirement plans this year. We plan to be over 90% funded globally in all plans by the end of this year.

The second element of our cash management strategy is investing in profitable growth. We are investing in new products and capacity expansion in each segment and across all geographic territory to take advantage of the strong demand for our products globally. Tim will say more on our specific opportunities later.

Looking out over the next several years, you should expect capital expenditures to run around 3% of total consolidated revenue. We have a lot of organic growth opportunities, so large acquisitions are not a part of our strategy. Rather, we will make investments in opportunities that fit strategically and allow profitable growth.

Finally, our cash management strategy will return value to our shareholders. We are actively engaged in a share repurchase program and have thus far repurchased 1.5 million shares of the 4 million share repurchase program we announced last year. Earlier this month, we announced a 39% increase in our dividend, on top of the 20% increase we announced last year. Share repurchase programs and increasing dividends are the two key methods we use to return value to our shareholders and you should continue to see us use them in the future.

Now, let me address our guidance for 2007. Through the first two quarters of this year, our earnings are higher than they were at this time last year. As we progress through the year, many of our end markets look stronger than we had previously expected and we have gained share in several key markets.

As we have become more confident, we are increasing our expectations for the year. Revenue for the year should grow 12% to 15% and annual earnings per share should be between $7.15 and $7.65. EBIT will be near the top end of our targeted range of 7% to 10% of sales. We still expect the effective income tax rate will be 33% for 2007. We remain excited about the opportunities we see in front of us and look forward to great performance for the rest of the year. Now, I will turn it over to Tim.

Thanks, Jean. I'm very pleased with our second quarter results, which continue to verify that we are more than a North American heavy duty truck engine company. Our results reflect good financial performance in many markets across the world. This will continue through the year and beyond.

For the second quarter, we had record sales for the Company, beating the fourth quarter of 2006. Record EBIT for the Company, topping the previous high in the second quarter of last year. Record sales for the engine business and just $4 million shy of a record EBIT set last year in the second quarter. Record sales and EBIT for power generation and components and record EBIT for distribution.

As I stated many times, the financial performance of this quarter continues to reinforce our optimism for 2007 and beyond. With the new earnings per share guidance we announced today, we will have our best year ever in 2007. Let me remind you that this is occurring despite the expected decline in the heavy duty truck market and is the result of strength in nearly every other end market.

Today, I will discuss our future profitable growth opportunities. These growth opportunities involve global and end market revenue diversification, longer term trends that are not cyclical and infrastructure investments around the world. Let's begin with the diversification of revenues in our four complementary businesses. As both Dean and Jean described, the key to our growth in 2007 continues to be our global and end market diversification.

Our international markets have grown 32% over last year, the fastest pace we have seen in several years. Our industrial and power generation products are competing successfully in the global markets, as countries such as China, India and the Middle East invest in infrastructure. Both industrial and power generation markets are up nearly 30% year-to-date. Those gains, coupled with the market share increases and medium duty truck and bus, are helping offset the $330 million decline in the North American heavy duty truck market we talked about earlier.

Even as our industrial engines and generator sets are benefiting from this infrastructure investment, we are capitalizing on a second area of long-term growth in all four of our businesses. This opportunity, which Cummins embraced several years ago, is based on the growing interest in diesel for lighter vehicles and changing emission standards throughout the world. The adoption of tougher emission standards around the world provides Cummins with its best opportunity for profitable growth in the near future.

We have invested heavily in emission technologies that extend from air intake to exhaust aftertreatment and also include high-pressure common rail fuel systems, controls and advanced turbocharging. As a result, we can more effectively integrate all of the key subsystems of a diesel engine to achieve better performance, as well as environmental compliance. This is a winning combination for us and our customers. And as we have said, we have the right technology for each of our markets. Better performance and environmental compliance, as a result of this integration of technology, have already resulted in growth for Cummins.

As we discussed before, the engine business has secured exclusive supply agreements for EPA '07 compliant engines with key OEMs and is winning greater shares in the on-highway markets. We expect to grow our share of the business with the top 100 fleets and achieve approximately 40% share in 2007, compared to the 25% share we had in 2003. To date, we have received significant heavy duty truck engine orders from large customers like Swift, Knight Transportation, Celadon, FedEx, U.S.A. Truck and UPS.

We are also making significant share gains in our medium duty products with major orders from Penske Leasing and Ryder for the Cummins ISB engine. In the components segment, more of our products are being used on each engine sale, not just on Cummins engines. Cummins Emission Solutions manufactures the catalytic exhaust systems used by engine manufacturers in both the United States and Europe. This business is expected to grow from $150 million in revenue in 2006 to more than $450 million this year.

Cummins Turbo Technologies has secured more non-Cummins business with engine manufacturers seeking advanced turbocharging for emission compliance and fuel efficiency. As a result, the turbocharger business is expected to grow nearly 40% this year. Our future prospects are even more exciting. Over the next five years, each of the major on-highway markets around the world will adopt stricter emission standards for on-highway diesel engines.

I can assure that you that Cummins will be there to help our customers succeed, meeting these stricter emission standards particularly in countries where we have a significant market share like Mexico, Australia, Brazil, India, China and in Western Europe. We are also preparing for the stricter emission standards in off-highway industrial and power generation markets, beginning in 2011. We expect to leverage our experience in the on-highway markets to create a winning combination for Cummins and our customers in the off-highway and power generation markets.

The opportunity in global emission standard changes is very significant over the next seven years and that's just from the existing legislation. We will talk more about the potential for longer term growth in this arena and how it will affect our margins at the analyst day meeting on September 18. This will be held at our engine plant in Jamestown, New York and we hope all of you are planning to attend. Our investment in this profitable growth opportunity in the countries I just mentioned will be sizable but our approach is to put capacity in places where it doesn't currently exist, not to build for market peaks.

We will spend nearly $2 billion on capital expenditures over the next five years and our unconsolidated joint ventures will spend another $1 billion during the same time period. I listed several of the capacity expansion projects in the teleconference last quarter. Most of our major 61 facility additions, expansions or upgrades are in markets outside of the United States and UK Europe, where we need the capacity for emission compliant electronic engines and generators, alternators, turbochargers, fuel systems, filtration and catalytic exhaust systems. Even as we focus on profitable growth and capital investment, we are confident that our operating cash flow will allow us to continue growing our dividend.

Earlier this month, our Board of Directors approved a policy of sustainable growth in the cash dividend and as a result, we raised the quarterly dividend 39%. This represents the second consecutive year the Board raised the dividend and is a sign of our ongoing commitment to returning greater value to our shareholders. In conclusion, let me say that as I meet with existing and potential shareholders, I can sense a change in how the investment community views Cummins today. Investors are beginning to recognize the changes we have made to diversify the Company and they can see they are working.

Investors are beginning to understand the strategic importance of our components and distribution businesses and the interrelationship of all four complementary businesses to our growth strategy. And investors are interested in understanding the long-term growth opportunities in which we are aggressively investing. This is an exciting time for Cummins. And again, I encourage you to participate in our analyst day and hear firsthand from our management team about the profitable growth opportunity in Cummins' future. Now, we'll take your questions.

Thank you, gentlemen. (OPERATOR INSTRUCTIONS) Your first question will come from the line of Jamie Cook from Credit Suisse. You may proceed.

Hi, good morning and congratulations. If you look at the top end of your guidance, you guys will grow your earnings about 12%. That's better than some of my diversified industrials do. But anyway, what I'm trying to figure out, Tim, I understand at this point you guys aren't giving quarterly guidance. But I'm just trying to get a feel for how good -- where was the second quarter, and any way you can quantify relative to your expectations? Because I'm just trying to figure out how much better that was and what that implies for the back half of the year?

I don't think I can comment -- I don't want to comment on the quarterly. This was an exceptional quarter for us. The third quarter tends to be a lower quarter as a result of plant shutdowns and OEM plant shutdowns and that type of thing. And we expect the fourth quarter to be pretty strong.

Okay. But there wasn't anything unusual in this second quarter, it was just all the stars sort of aligning?

Yes. It was -- all the markets were strong. We gained share in the heavy duty market in North America and we were able to meet the production. We managed the supply base. So, the execution was very good in the second quarter.

And then outside -- the share gains that you guys have been experiencing on the on-highway engine business, I don't that comes to anyone's -- I think that's been pretty well documented. Outside of on-highway engine, can you talk about some of the share gains you are seeing on the power gen mining or oil and gas type applications or anywhere else outside of on-highway engine?

Well, mining we have grown. And it's measured differently but we think we have grown to 45%. The RV business we're going from 59% to 70%. Oil and gas, that's historically a small market for us. So, we are gaining share there but it still remains small. But over a long period of time, I think it is a big opportunity, particularly for our high horsepower engines. And I will let Tom comment on power generation.

Power gen, we don't have nearly as good of figures from a market share point of view. But two key trends, I would say. One is, we are penetrating international markets where we haven't been a big presence before. Dean mentioned the Middle East, which is a good example of that. And the second thing is that, the mix in North America is really moving to the higher end of generator set size where there are fewer players and therefore, we are gaining market share as a result of mix in the market, if nothing else.

Okay. And then just --?

Just one other. The Dodge Ram heavy duty pickup truck is now 33%. So the three U.S. OEMs are about 1/3, 1/3, 1/3. And Dodge -- all pickup is roughly about 23%. And we are about 89% dieselization in that. So there's a lot of growth, even though that market is pretty soft right now.

Okay. And just last question on the pricing front, you are hearing from some of the other guys -- some of the truck OEMs about, in North America anyway, difficulty passing through some of the -- all of the price increase on the new truck to the dealer, or to the customer. From your perspective, are you seeing anything like that? Are you concerned? Have you had to take any discounts to push your engine through?

No, we are not discounting.

All right. I will get back in queue. Congratulations.

Thank you. And your next question will come from the line of Peter Nesvold from Bear Stearns. You may proceed, sir.

Good morning. Well done, guys. In the past, I have sort of beaten you up on the balance sheet. Now, that you are down to effectively zero net debt, Tim, as I listen to you outline the growth prospects, which I'm enormously excited about, but $2 billion in CapEx spending over the next five years or so, do you expect to be able to fund that all through internal cash flow? Or now that the credit rating has started to move in your favor, do you see an opportunity when the credit markets settle down a bit to maybe revisit that market?

Yes, all of the organic growth opportunities, as well as returning value to the shareholders we can fund from our internal cash flow. And in June, we basically do five-year simulations and that type of thing. And so our cash flow remains strong through that period of time.

The one thing that I will say is that almost on a weekly or monthly basis, we are seeing more opportunity and are having to revisit our capacity investments. As I said in my prepared remarks, we've got 61 facilities that we're increasing capacity or new facilities and that type of thing. So, we'll revisit that capital spend over the next five years. And if we see really good secure volumes, then we will raise the capacity.

An example right now is that we are raising capacity 15% to the middle of next year in our high horsepower. I think we will definitely have to revisit that. We are increasing our heavy duty roughly 10% and that's through incremental changes. And our U.S. medium duty volumes, we're increasing capacity by 17%.

So that's where some of that -- and that doesn't include all of the components capacities. Our capital structure, right now, we are about 17% debt-to-capital. We are in the process of re-evaluating what the ideal capital structure is. And we will be talking in detail about our policy and the logic for that policy at the September investment -- investor conference.

Okay. A question. Tom, a question for you. In the first quarter call you said that the power gen EBIT margins really couldn't sustain at the 1Q levels. And I think you'd even made a remark that Tim had kind of pushed you to raise your guidance at the Board meeting ahead of the quarter. But here, we're sitting here in the second quarter and you held them pretty flat quarter-over-quarter. So, I want to ask the question, what happened in 2Q where it came in so much better than what you were sort of suggesting it might look like this quarter?

First of all, I want to thank you for reminding me that my boss was right and I was wrong, Peter. I appreciate that. He wasn't already celebrating that enough. The answer is that, we are really pleased with the level of the EBIT margin. And again, I think the main points that were hit were the principal drivers. Dean talked about the fact that from a shipment level, we really achieved levels that maybe we didn't think we could quite get to.

And because we are operating so near capacity on the high horsepower side, we are talking about pretty marginal increases make a big difference now because everyone we can get out has an impact on volume and margin. We had pretty good shipments in this quarter, particularly in North America. We also had pretty much no real issues in any of the markets.

And then, the last thing I would say is that we have been seeing more realization of price increases that we introduced at the end of last year by this time maybe than we expected. Cost inflation remains an issue but because we have been trying to keep up with price increases and they have been rolling in because there is a bit of a lag effect when we announce price increases because of orders on the books already. They have been rolling in at a pretty good rate.

I would highlight one thing, which is the alternator business has been sustaining growth in sales and profitability, which, again was not really -- we really did not forecast for the year or even at the beginning of the year. And it has continued at really, really high rates. That business is doing outstandingly well.

So, I know the official guidance is you'll stay above the 7% to 9% range for the year, in terms of margins, which is a no-brainer at this point. How much -- do you sustain it at kind of this level? Does it take a step back in the back half of the year?

That's why Tim gave me the job, it's a no-brainer. He gives me those no-brainer jobs. But the answer is, I think our view of margins is that we don't see anything that's a big boost or a big detriment to margins from where we stand now for the rest of the year. We are looking at the rest of the year a lot like we looked at the first half of the year. There's some moves in round about and some of the segments and things like but not a big change from the point of view of volume or margin.

Okay and last question. I noticed the engine joint venture income was up 39% year over year, which was the best since first quarter '05. What happened in 2Q and specifically in the engine JV segment that drove that strength and does it continue?

It was almost all China and this is usually a pretty seasonal strong quarter in China.

For the on-highway markets. I think the other one that you'll see, when you look at the slide that we have where we break out the joint venture income by each of the operating segments in our Webcasts, you will notice that not only was on-highway strong, which was Jean's point in China, but also we were seeing in some of our industrial markets, we were seeing some strength. Marine being one of those where we were seeing improvements year-over-year.

Thank you very much. And your next question will come from the line of Andrew Casey from Wachovia Capital. You may proceed Andrew.

Questions on the quarterly performance. The margins were very good but there were some detractors, if I could dig into them a little bit. If they are on the slides, I apologize, I've had trouble getting them. In the components area, can you quantify the realignment costs taken during the quarter?

I think if you are trying to dig into kind of a quality of earnings perspective, I think overall for the Company, very high quality of earnings this quarter. Within the components segment, we did have, as we indicated in our scripted remarks, some charges for the closure of a plant in the filtration business. We did have some offsets to that for the component segment really kind of neutralized the charge for the closure of the plant.

The way I would describe it is the engine business, the power generation business and the distribution business are operating extremely well and the components business, which has had some problems improved significantly in the fourth quarter. You're getting a lot of revenue growth -- I'm sorry, second quarter. You're getting a lot of revenue growth from emission solutions and it's operating profitably now, and also revenue growth from the turbocharger division. The fuel systems business is pretty flat. And we're seeing improvement in the margins in our filtration business, as we said. One, because the fact is that we are extracting ourselves from some of the exhaust business for smaller engines. And also their volumes increased and their aftermarket business is increasing.

All right. I understand that you are doing a lot of stuff. What I'm after is you're at, by my calculation, around 6.3% in the quarter on the margin there and you have been saying that by fourth quarter, you get to 7%. And I'm wondering if without that plant closure, you would have been a lot closer to the 7% or are you --?

No, no. That would have a fairly minor impact on the margin.

Yes, Andy, I would say that you should not be surprised if performance on our EBIT as a percent of sales basis is not as good in the third quarter as it was in the second.

Okay.

Okay? And part of that is we've got a very strong business in Europe. There's a lot of European shutdowns in the third quarter. And we are also doing a number of things, as part of Tim's sort of comment about 61 different activities going on, rearranging some things in terms of where we are doing what, to get in even better and better shape for both the ramp up that we are going through on new products, as well as the expected growth we'll see through this year and into next. So where we are is to -- I think what you can expect, is probably third quarter performance, EBIT as a percent of sales point of view, not as good as second. But for volume-related reasons, and rearrangement-related reasons as opposed to any earnings that weren't quality earnings in Q2 you can still expect that in Q4, we will be at least at the minimum of our target range, which for the segment, which is 7% to 9%. For the component segment, 7% to 9%.

Thanks. I bet your golf game hasn't improved one bit, Joe.

What golf game?

The next question in power generation, Tom, could you comment on how much pricing added to revenues, please?

No, I can't. But I can say that it was definitely a contributor. And A, I don't think -- we don't normally give the numbers. And B, it's always a combination in power gen, no matter where you hear that, it's a combination of mix and pricing that's a little hard to separate. But let me just put it this way, here's the way to do the math in your head. Our margin increases are more a function of price and cost than they are of volume absorption that you have, I think, seen in the genset plants. Generator set plants are generally not huge on fixed cost absorption. There is some effect, no question about it but it's not a huge effect. The pricing cost is a bigger effect and price outpaced cost again in this quarter.

Okay. I will answer the question from the total Company, since we don't give it by segment. From a currency perspective, revenues were increased by $86 million as a result of currency, which had really minimal impact, maybe $1 million on EBIT for the Company during the quarter, on a year-over-year basis.

The other think I'd say about Tom's business and I have been in both plants this quarter, the second quarter, is the plant in Fridley, Minnesota, and the one in Kent, England, have -- are starting to see some of the improvements they have been working on for the last year. So, I think some of the gross margin improvement in power generation is due to, not only from the pricing and watching the costs, but we are getting more efficient at our manufacturing.

Okay. Great. And then if -- this will be the last question. On a longer term basis, you've outlined pretty effectively, the components opportunity some of the light duty diesel opportunities. One thing that seemed to be omitted in the monologue was the China opportunity and the increased coverage. Is that something we can assume will hit before end of decade or should that be assumed it's going to be after the end?

You should expect it's going to continue to hit year by year beyond just the end of the decade. So in other words, what we have publicly said is that all sales, including consolidated and unconsolidated sales between China and India, I'll put them both together, are a little bit more than $2 billion. And our plan is to get to $5 billion by 2010. There's some chance it could be a little higher, some chance it could be a little lower. If it's a little lower, it's just a function of timing. And in other words, how well we are ramping up with some of the OEMs in which we've won business but aren't yet -- they aren't yet selling those vehicles with our engine in it. So we still see significant growth and we expect a significant portion of it, if not all of it or more, to hit by 2010.

And in China, let me remind you, we are developing a 13-liter engine, and two platforms on smaller diesels of 2.8 and a 3.8-liter. All of those development programs are doing very well and we are in production with Shaanxi with our 11-liter engine as well, and we are increasing the capacity for our Dongfeng joint venture.

I will also just mention that flooding in Chongqing has closed our plant there for the last two weeks. I think we hope to be up and partially operating next week but that will have some influence on our China revenues and income.

And then in India, we're increasing right now our midrange automotive engines from 90,000 a year to 120,000. And then we will be going to a second plant there where we'll be going in 30,000 increments, showing how strong that market is. And then we also have the ability -- we will have the ability to export from India. So, both India and China are on track, as we have been talking publicly, and remain an important part of our diversification and an important part of our strategy.

Okay. Thank you very much and congratulations.

Thank you, gentlemen. And your next question will come from the line of Joel Tiss from Lehman Brothers. You may proceed, Joel.

Get all the doubters to start to fall by the wayside.

I hope so.

I wonder if you could just talk maybe a little philosophically and maybe not so much about Cummins but just about the truck industry in 2008, given where the U.S. economy is, sort of North American heavy duty trucks in 2008? Given where the economy is, do you think that the industry is going to be able to absorb all the extra capacity that's out there now or do you think maybe we'll start off with a little bit of a slow first half and it will start to build?

Overall, our view right now is a market of about 250,000 in '08, and over 300,000 in '09. And I think the -- whether it grows faster in the first half or the second half, one of the criteria will be how successful the '07 engines are this year, both in terms of reliability as well as fuel economy. But we are seeing right now considerable activity in the second half from some of the larger fleets. And they are looking at their buy over the next two years, and I don't see that -- I think it's strengthening rather than softening. So there may be some variation quarter to quarter but '08 and '09 should be pretty strong years for the heavy truck market.

Okay. And can we zero in on the marine industry just for a second too? And can you give us a little bit of maybe the same thing, a longer term outlook of where we are going and also where your Company is going? Are you moving more up into cruise ships and things like that? And just what the outlook maybe for '07 and '08?

If you look at recreational marine, it's -- we have gained some share, even though that market is a little soft. So it's relatively flat right now. We have some new technology coming out later on this year which we think is going to give us some significant opportunities. On commercial marine, essentially we are sold out this year and we are taking orders right now through the middle of next year. And again, our products seem to be doing very well.

We are into supply boats and crew boats for the oil and gas industry. We are also seeing some expansion on the inland waterways with tugs and barges and so forth. Also, considerable growth internationally, some in Europe, a lot in Asia, some off the coast of Africa for their oil and gas. So, I think if you equate the price of oil and how well the oil and gas market is doing, you can transfer that right back to the commercial marine business.

Okay. And lastly, can you just talk about the size of the APU market on those little APUs on the trucks and about what your share is?

The size of the APU market is -- it's hugely in flux today. Last year, I saw some numbers that said it was around 30,000 units last year. In the first half of this year, it's been significantly lower than that, though. There's definitely a lot of people interested. I'm certain that we have talked to just about every major truck fleet, not to mention every OEM about them and there's a lot of interest. And of course, the upcoming CARB rules are driving people to think about that.

But what I would say is there's still a lot of people thinking about how they want to use it and where they want to use it and what's the best way to do it. So the market is in a bit of hesitation. Our sales for the first half, just as an example, are disappointing relative to where we hoped they would be.

So again, our conversations are active and I expect that we'll definitely have a better year next year and things will grow pretty quickly. Right now, they are kind of in a stall point. And I think that's -- of course, not every competitor I know the data for but my thinking is that's common across the industry that most people in the APUs markets, their sales are disappointing for the first half but that people are having lots of conversations and expect volumes to grow in the second half and definitely into next year.

I think there's a couple of key things, though. There is and there will be more legislation that will severely limit idle time in trucks. And if that happens, then the APU market is going to grow substantially. And the flux that Tom's talking about is a debate between batteries and engines right now. And one way that I would say -- advise you to look at is, which APU units get first fit with the OEMs? And then that will create the aftermarket. The retrofit market that is kind of what Tom's been talking about so far is interesting but it's not big. But I think this still represents a significant opportunity for Tom's business.

Yes, and the first fit, to Tim's point, there's not that many available in first fit today and those that are, are priced pretty fully. So the users are kind of mostly in the aftermarket today, which as Tim said is kind of an awkward way to get it.

But I just want to add, we think we are going to be extremely well placed in terms of product for first fit and that the flexibility of our system to work well in hot weather or cold weather and to provide the kind of advantages that people who run trucks are going to be looking for, in terms of meeting idle legislation but also reducing operating costs, will be terrific. So things are slower than we wanted them to be but we believe that from a product point of view, we are going to be very well positioned and gain from a market point of view position, in a step-by-step fashion.

Okay. Great. Thank you very much.

Thank you, gentlemen. And your next question will come from the line of David Bleustein from UBS. You may proceed.

Good morning. And let me add to the congratulations bandwagon.

Thank you.

Here's the question, with all the market share you are apparently taking from more than one customer, when would you expect, do you expect or have you seen any form of competitive response?

No. We don't comment too much on that. But we are -- at least our forecast reflects some appropriate prudence. Both -- some of our competitors have been a little bit slower off the starting blocks than we were relative to readiness on '07. And we're expecting that given the quality of the companies themselves, that they will come back reasonably strong.

And so we're balancing our look at the future on one hand, saying some folks who were slower off the blocks will be better as the year goes on. On the other hand, given what we are seeing relative to our product and how it's performing, we're feeling reasonably comfortable at the end of the day, once the people have run enough of these, that people are going to feel really good about our product versus the other guy's product. So we are kind of sitting and waiting and watching right now and feeling pretty good about the hand we've got right now.

All right. The follow-up is, on a similar conference call -- not similar, because your stock is up and theirs wasn't but the competitor basically said we expect to be back to our historic market shares by yearend. The question for you is have you seen anything from them that would enable them to get back to their historic market shares or are they just hopeful?

We are clearly not saying that because what we are saying basically in our earnings estimate for the year is that our share of the North American heavy truck market for the year will be really at least as good as it is right now. So, yes, while there may some month gains relative to where things were in April or May, we are expecting that we're going to be at least as good as where we are right now. And that means what you heard can't be true, at least as far as we are concerned. On the medium duty side truck, there's no question, we will be close to doubling our share of that business, not quite, but by the end of this year. And if not by the end of this year, our share will be up by a factor of two as we work our way into and through '08. So I don't know how else to comment, other than to say that.

Terrific. Thanks a bunch.

Thank you, gentlemen. And your next question will come from the line of Eli Lustgarten. You may begin, sir.

Let me join the wow committee. It's probably appropriate for the quarter. Can we just follow up on David's question? I think in your prepared remarks, you talked about a 40% share or a goal of a 40% share in the heavy trucks business. You're at 33% now. And obviously then Caterpillar has said they're going back up from 22% back to more normal levels. Have you -- do you think you have enough orders in place at this point to keep your share and drive it up towards 40% this year? Or how do you get to the 40% number?

First of all, I think you misheard it.

Okay.

Basically, where we are at through May is around 32%, 33%, about 1/3 of the market. What we are saying in terms of our forward earnings estimate is that we think that's where we are going to end the year. All right? Yes. The 40% number that Tim referred to was referring to basically the top 100 fleets.

Okay.

And where -- and four years ago we had approximately 25% of their business, this year we expect to be around 40% of the business of the top 100 fleets. But for the market, right now we are assuming our share will be, for the year, about what it is right now.

But the other thing on the 40%, is that the smaller fleets pay a lot of attention to what the top 100 fleets are buying. So, that's why I think it's significant that we've gone from 25% to 40% there.

And the share gain is more than just from Caterpillar. You are assuming that you'd be able to hold off -- that your engine will be preferred over the Volvos and the Detroit Diesel also, if those share gains will continue?

Things are going to move around a little. If you look at the most recent numbers from Volvo, for instance, their volumes are fairly low. I think you've heard a little bit about from them as to some of what their issues were. But our share of their business is disproportionately high given the low volumes right now. So I think recently we have been showing to be around 2/3 of their business. The year for us will be, frankly, more like 1/3 of their business. All right?

I see.

And so you are going to see some shifts. But there are places where we might continue to gain share as we go through the year, as well as a couple of places where we'll probably lose a little share -- lose share, like Volvo. But again, we are confident that we will be at the end of the year no worse than where we are right now from a share point of view, which is around 1/3 of the market.

And can I get Tom to talk a little about the power gen business, not so much in '07, which is a gold mine but can we go out to '08, in what is now widely perceived as a slowing European market? I'm not talking collapsing but coming off the high levels when comparison gets tougher and whether it basically increased penetration of the some of these other markets that will offset probably a slower market for power gen outside the U.S. next year.

That's not far off, I would say, Eli. The two things, the infrastructure building at the high end of the market, the larger sets, we think will still be good next year and we will have more capacity to sell. And then to your point, the penetration of some of the new markets, largely offsetting some of the slowing in some of the base markets. And Middle East is a really good example. The Middle East market has grown. We've tripled, basically, our Middle Eastern business in the last three or four years. And that business, while it won't triple, is still growing really rapidly.

India is another market that is still growing really rapidly. We have been making penetration gains in Latin America that are beginning to be real numbers for our total sales. So, there's a lot of stuff -- a lot of ways that our growth is building up, which I see continuing into '08. I mean, '08 is still far enough off that I don't want -- I'm not sure. But right now, we see '08 being another opportunity for us to grow the business pretty steadily.

And with that kind of mix shift can profitability sort of keep close to the record levels we are at and above the -- will it force you to revise the range that we've been talking about as normal?

That's what Tim says. We are -- we'll talk a lot about that at the investor conference. I think we are obviously -- we think of growth as profitable growth and so we always think about margin and growth in profits, not just sales. So, that will be relevant to where we're growing and how we're growing for sure. And we'll talk about that at the investor conference.

Can I get one clarification? Are you producing your own SCR engine in Europe right now or is that through a joint venture?

In terms of the SCR product itself that we're supplying in Europe, it's a product that we, Cummins, are building. Right? And our customers are basically both our engine and other people's equipment, as well as other people's engines and their equipment.

Okay. But you're supplying yourself it's not through any joint venture?

No, no joint venture.

Okay, we've got to wrap this up but I just want to add, this investor conference that we're having at our Jamestown engine plant, which is our heavy duty truck engine plant and there is also an emissions solutions business there that you'd be able to see, I really would encourage as many of you to come as you possibly can. We'll have our entire management team there, both in terms of prepared remarks but they'll also be available for one-on-one discussions. So, it could be an opportunity for you to learn a lot more about our business and particularly about our growth opportunities going forward.

Thank you, ladies and gentlemen, for your participation in today's presentation. You may now disconnect, and have a wonderful day.